August 21 2024 17:30
With Real Estate Investment Trusts (Reit) lowering their debt levels, strengthening their balance sheets, and reporting higher earnings, it is likely that payout ratios could increase from current levels.
This is according to a report released by the SA Reit Association, a body which represents Reits. Reits are property funds which are required to pay a minimum of 75% of their distributable income as dividends each financial year in terms of the South African dispensation.
The average payout ratio by South African Reits has declined from 93.5% in the 2019 financial year to 75.6% in 2023 financial year. Payout ratios are expected to increase to about 78.4% in the 2024. This is according to the Nedbank Corporate and Investment Banking (CIB) research commissioned by the Research Committee of the SA Reit Association on the payout ratios of JSE-listed REITs in a global context.
Ridwaan Loonat, Senior Equity Research Analyst at Nedbank CIB, said there was growing optimism for Reits.
“We forecast an increase in payout ratios over the medium term as current retained earnings are used to reduce debt and strengthen balance sheets with company earnings benefitting from potentially lower interest rates,” he said.
Joanne Solomon, CEO of SA REIT Association, said: “We welcome the research findings which affirm that SA REITs are aligned to global peers. As an organisation, we highly value feedback from our members, investors, and fund managers. This input helps us enhance our performance and position the sector as an attractive investment opportunity both locally and internationally.”
Loonat said: “A payout ratio is the amount of earnings the company pays to shareholders in the form of a dividend. For Reits, a payout ratio is expressed as a percentage of distributable earnings. A large contribution to the total return of listed property companies is its income, which is dividends.”
The JSE requires listed REITs to distribute at least 75% of taxable earnings to shareholders annually, subject to the solvency and liquidity requirements as per the Companies Act, he explained
Loonat said that for SA REITs, earnings that are retained would be subject to taxation, commonly known as tax leakage. If a company can minimise its tax leakage through assessed losses, it can retain more income. If a property company is not a REIT, then that company is not obliged to declare a dividend, and it would be up to the Board to decide if and when it would declare a dividend, if at all.
According to the research findings, the global average payout ratio is currently 76%, slightly lower than its 5-year average of 79%. Distributions in the Asia-Pacific (APAC) region were less affected by the COVID-19 pandemic compared to South Africa and the US, which saw payout ratios decline 18% and 15%, respectively. European payout ratios remain below peers.
The research showed that in the US and UK, REIT distribution regulation requires that at least 90% of taxable profits are paid as dividends, while in Belgium, the rule is at least 80% of net profits.
In Germany, the distribution rule is 90% of net income, while in France, three rules apply – 95% of tax-exempt profits from qualifying leasing activities, 70% of the capital gains and 100% of dividends received from subsidiaries that have elected for the Société d’Investissement Immobilier Cotée (SIIC) regime. A SIIC status is a special arrangement provided by a French law passed in 2002 giving tax benefits to publicly listed companies.
alistair@propertyflash.co.za
